For Services Rendered? How to Avoid a Pyrrhic Victory in Court Taxation in Hong Kong
In olden times, according to John Grisham, attorneys would render single-page bills to their clients. A handsome but reasonable sum would be prefaced with three solitary words: “For Services Rendered”, with the expectation that the client would happily and gratefully settle the demanded sum with haste.
Those days are long gone, if they ever existed at all.
In real life, disputes occur frequently between solicitors and their clients over billing. For good reason: solicitors have a duty to act in the clients’ best interests, which may or may not be the cheapest option available; clients, on the other hand, wish to maximise the cost-effectiveness of services they obtain.
Most of these disputes are settled commercially, confidentially and amicably, primarily because both sides are keen to maintain a mutually beneficial business relationship; and also because the official adjudication process of client bills – court taxation – is costly, tortuous and laden with uncertainty and risks for both client and solicitor.
Taxation itself is seemingly weighted in favour of the solicitor, as it is conducted on a “solicitor and own client” basis, meaning the Court will allow all costs unless they are unreasonable or unreasonably incurred – with the important proviso that all costs incurred with the express or implied approval of the client are conclusively presumed reasonable.
Even against this context, it is all too easy for parties to end up in a ‘lose-lose’ situation – which with the benefit of hindsight, could easily have been avoided.
On 22 February 2023, two judgments in Hong Kong were published involving “hotly contested” bill disputes between Oldham, Li & Nie (OLN), a solicitors' firm, and their former client, Andrew Kao (Mr Kao).1 One involved OLN representing Mr. Kao in matrimonial proceedings, and the other involved OLN representing Mr. Kao’s companies. In both cases, Mr. Kao challenged OLN’s bills.
The Dispute over Court Taxation
Both parties in the proceedings employed successful statutory taxation gambits against each other, which initially led to a mutually inconsistent result.
- Mr. Kao relied on section 67(5)(b) of the Legal Practitioners’ Ordinance (Cap 159)(LPO), which provides that if the taxation procedure reduced the claimed amount by over one-sixth (16.66%), all of the costs of taxation would be borne by the solicitors. OLN had claimed close to HK$1.3 million, but in the end, the taxation master reduced it by way over 20% to around HK$1 million.
- OLN had submitted a Sanctioned Offer of around HK$800,000. Under Order 62A rule 20 of the Rules of the High Court, if the paying party, i.e. Mr. Kao, does not agree to pay the Offer and taxation results in a sum higher than the Offer, he would be subject to costs sanctions starting from the expiry date of the Offer.
The resolution of the inconsistency was straightforward. The taxation master ruled that the Court had unfettered discretion based on the wording of the LPO. Of greater interest, though, was the focus on the parties’ actions – which the taxation master highlighted – leading to neither party getting what they wanted.
On the clients' side, Mr. Kao's new solicitors argued that he should be allowed all of the costs until the Sanctioned Offer's expiry date; which the Court held was a presumption Mr. Kao should not have made, given the Court's discretion over costs.
Further, the Sanctioned Offer itself was exceptionally low compared to the amount of costs claimed, and Mr. Kao's failure to consider it had led to a lot of wasted costs and time. The Court also found that he had claimed to have incurred an "exorbitant" amount of costs prior to the date of the Sanctioned Offer, an impression which did his position no favours.
On OLN’s side, the Court pointed out that its Sanctioned Offer had been at a level much lower than the LPO's one-sixth trigger, and commented that OLN "had practically admitted to have significantly inflated its bill of costs for taxation purposes" – and had only done so very close to the taxation hearing itself, after much costs had been wasted.
The Court also criticised OLN's choice to apply costs on account paid in one set of proceedings to its bills in another set of proceedings. Ultimately, the Court found that due to its ruling, Mr. Kao could not claim his "exorbitant" amount of costs, while OLN did not deserve to be awarded further, and denied the relief claimed by the firm.
These kinds of cases are, in the grand scheme of things, small disputes limited in their scope. Nevertheless, both clients and practitioners should take heed of how matters can spiral out of control easily, and attempt to structure their service provider relationships with an eye on resolution of the matter. After all, clients engage solicitors to solve problems, not to create new ones.
The chief takeaway is that both client and solicitor should have detailed agreements in place prior to engagement regarding how fees are to be charged and paid – and keep the client regularly informed on work done so as to manage their expectations on fees incurred.
This is especially the case when, like Mr. Kao, there are multiple proceedings and/or multiple client entities involved.
Clients should consider reviewing their legal spend regularly – and the solicitor should forewarn the client of any expected spike of legal costs, such as document disclosure and review, and ensure the client knows how costs on account may be spent.
It is clear from the judgments here, and also from our experience, that taxation is never enjoyable for any party involved, including the Court, which can, and will, publicly criticise the conduct of parties.
For example, judging by the level of its Sanctioned Offer made to Mr. Kao, the Court rightly or wrongly drew the inference that OLN had significantly inflated its bills. Both sides’ taxation gambits failed and neither recovered any of their costs thus incurred.
If taxation is unavoidable, both clients and solicitors should take great care in their actions before the court, or else they run the real risk of losing even while denying the other side's relief: a true Pyrrhic victory.
1 Andrew Ko Kao v. Oldham, Li & Nie, Solicitors (A Firm) HCMP 2129 of 2021; Sinostate Enterprises & Anor v. Oldham, Li & Nie, Solicitors (A Firm) HCMP 2178 of 2021.